Matter of Curio Shoppes, Inc., Bankruptcy No. 2-85-00171.
| Decision Date | 08 November 1985 |
| Docket Number | Bankruptcy No. 2-85-00171. |
| Citation | 55 BR 148 |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In the Matter of CURIO SHOPPES, INC., Debtor. |
Martin W. Hoffman, Hartford, Conn., for debtor-in-possession.
Eugene M. Kagan, Hartford, Conn., for Irving Eisenbaum, Landlord.
The principal issue in this proceeding is whether equitable considerations may be employed in a chapter 11 reorganization case in applying a recent amendment to the Bankruptcy Code — 11 U.S.C. § 365(d)(4) — which grants a landlord of nonresidential real property the right to possession when a lease is not timely assumed.1 Before reaching that issue, the court must first rule on the landlord's contention that the lease in question was terminated under state law prior to the bankruptcy filing so as to preclude its assumption.2
These questions procedurally arise from two motions. One, by Curio Shoppes, Inc. (debtor), the debtor-in-possession in this chapter 11 case, seeks authorization to assume a lease from Irving Eisenbaum (landlord). The motion, dated May 6, 1985, was received by the bankruptcy court on May 14, 1985. The motion alleges that the debtor, the operator of a restaurant business, is in possession under a lease of premises located in a shopping center in Bristol, Connecticut, and that assumption of the lease is necessary for the debtor's reorganization. By motion dated May 24, 1985, and filed on May 28, 1985, the landlord moved for possession of the premises. He asserts that an order for relief in the case had entered on March 7, 1985, the date the debtor filed its chapter 11 petition, and that the debtor having failed to assume the lease within 60 days from March 7, 1985, the landlord is entitled to immediate possession.
The hearings on both motions, originally set down by the court for June 5, 1985, were continued by agreement to August 14, 1985, when the parties appeared and a trial was held. At that time, the landlord raised the matter of whether a lease was in existence on March 7, 1985, the date of the bankruptcy petition. Each party has submitted a post-trial memorandum setting forth its claims of law based upon the following facts established at trial.
The lease between the debtor and the landlord covers a portion of a building in a shopping center known as Shop-Rite Plaza, located in Bristol, Connecticut (premises); has a five-year term dating from August 1, 1982, with an option to extend for five years at increased rental; and restricts the use of the premises to operation of a restaurant. The debtor is obligated to pay monthly rent of $1,250.00, common area service charges, and a pro rata share of insurance costs and real estate taxes. On August 1, 1982, the date the lease was executed, the debtor had three stockholders — Dean Harper, his brother Scott Harper, and Ron Uricioli. Dean Harper and Uricioli owned a majority of the common stock. After the first lease year, the restaurant did not prosper and in August 1984 Dean Harper and Uricioli transferred their stock, for no consideration, to Scott Harper and his wife, Sheryl Harper (Sheryl). Paragraph 14 of the lease generally prohibits assignment of the lease without the landlord's consent and includes the following provision:
If tenant is a corporation and if any transfer, sale pledge or other disposition of the common stock shall occur, or power to vote the majority of the outstanding capital stock be changed, then tenant shall so notify landlord and landlord shall have the right at its option to terminate this lease upon five days\' notice to tenant.
During September 1984, Sheryl discussed with the landlord the details of the recent stock transfer from her brother-in-law and Uricioli to herself and her husband. The landlord took no action and continued to accept monthly rental payments until January 23, 1985. On that date, the landlord sent a letter (not introduced into evidence) to the debtor claiming the lease had been terminated because of the stock transfer.
The landlord sent a second letter to the debtor on January 23, 1985, requesting the debtor to pay $901.58 as its pro rata share of taxes. The lease provision concerning reimbursement to the landlord of real estate taxes and insurance states:
Landlord will provide Tenant with paid receipts of these two items and Tenant has thirty (30) days to reimburse Landlord for their pro rata share. In the event Landlord does not receive payment within the said thirty (30) day period, the lease is automatically cancelled.
Sheryl sent the February 1985 monthly rent check to the landlord, but he returned the check to her under a letter dated February 7, 1985, which read:
Enclosed find your tendered rental payment for the above captioned premises, for the month of February 1985. I am returning this check because your lease has been cancelled by letter of January 23, 1985, copy to your attorney. This is demand on you to please vacate the premises.
Apparently flustered by the return of the February rent check and a request for the tax check, Sheryl did nothing3 until the landlord sent the following letter to the debtor on February 23, 1985.
I enclose copy of letter sent to you on January 23, 1985 requesting payment of Real Estate Taxes on the portion of space Curio Shoppes occupies at Shop-Rite Plaza in Bristol, Conn. I also enclose Addendum to Lease which states you have 30 days to pay this bill. You did not tender payment. Now, the lease has previously been cancelled because of Paragraph 14 of the existing lease and this makes a double cancellation. You are hereto notified to quit the premises.
On February 27, 1985, Sheryl resubmitted to the landlord the February rent check together with a check for the taxes. The landlord retained both checks, but did not cash them. The debtor mailed the rent to the landlord for all subsequent months, which checks he retains uncashed. During a meeting in February, the landlord advised Sheryl that the best thing for the debtor would be to file a chapter 11 petition.
The debtor's restaurant is a full-service, family-style restaurant, employs 15 people, and is open from 5:30 a.m. to 8:00 p.m. The debtor has explored moving the restaurant to other locations in the area, but no rentals are available at anything near the rent the debtor is currently paying. The cost of moving the restaurant, kitchen equipment, furnishings and fixtures would be prohibitive. Since the filing of the bankruptcy petition, the restaurant has made a modest profit. The debtor intends to propose a plan paying a 25% dividend over time to unsecured creditors. If the debtor were to be liquidated, there would be no dividend. The landlord has offered to relocate the restaurant to another store within the shopping center, but at double the rent per square foot that the debtor is now paying.
The debtor's attorney who filed the bankruptcy petition prepared the debtor's motion for authorization to assume the lease. He testified he prepared it on May 6, 1985, and instructed his staff that it be mailed immediately. As noted, the motion arrived at the bankruptcy court on May 14, 1985. Counsel for neither party questioned the debtor's attorney as to why he waited until May 6, 1985 to prepare the motion for authority to assume the lease, and no explanation was offered for the eight days it apparently took the motion to reach the bankruptcy court on May 14, 1985.
The landlord claims that there was no lease for the debtor to assume at the time the debtor filed the petition. He contends that by virtue of the debtor's pre-petition violation of the lease provisions concerning stock transfer and payment of real estate taxes, the lease has terminated. For the reasons stated below, I find that the lease was in effect on the date the debtor filed its petition.
The debtor notified the landlord of the August 1984 stock transfer early in September 1984. The transfer, for no consideration, made Sheryl and Scott Harper the sole stockholders after the other two stockholders left the business. The landlord registered no complaint and accepted the rent checks the debtor tendered for the remainder of 1984. It was not until January 1985 that the landlord informed the debtor that he considered the lease terminated by reason of the stock transfer.
Under Connecticut law, a landlord's acceptance of rental payments by a tenant constitutes a waiver, absent evidence to the contrary, of any prior lease default of which the landlord has knowledge. Xanthakey v. Hayes, 107 Conn. 459, 468, 140 A. 808 (1928). Acceptance of rent does not imply a waiver of a continuing breach or future breaches by the tenant, Club Road Corp. v. Whitehead, 34 Conn.Sup. 580, 584, 378 A.2d 110 (1977); it does, however, constitute a waiver of any prior breach, whether due to non-payment of rent or otherwise. Segall v. Gagliardi, 103 Conn. 497, 502, 130 A. 896 (1925) (). I conclude that there was a waiver by the landlord and that the lease was not in default on the date of the bankruptcy petition on account of the stock transfer made in August 1984.
The debtor was obligated by the lease to pay its pro rata share of the real estate taxes 30 days after notification. The landlord's return of the February 1985 rent check together with the landlord's request for a check for taxes understandably confused the debtor. In any event the landlord received and retained the tax check, together with a rent check in February. He also received and retained the March rent check. Even if, under the above circumstances, the debtor's failure to pay the taxes within 30 days after notice ...
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